On December 9, 2022, Federal Tax Authority (the FTA) issued Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Business (the CT Law). According to this law, businesses will become subject to UAE Corporate tax from the beginning of their first financial year that starts on and after 1st June 2023.
CALCULATION OF TAXABLE INCOME
1. BASIS OF CALCULATING TAXABLE INCOME
The CT regime proposes to use the accounting net profit (or loss) as stated in the financial statements of a business as the starting point for determining their taxable income after making adjustments as necessary.
Corporate tax UAE is calculated at 9% of the net profit shown in the company’s financial statements after deducting all applicable deductions and excluding the exempted income. Any foreign taxes paid will also be allowed for reduction from the profit shown in the financial statement.
Corporate tax in the UAE will be levied on the annual taxable income of a business
The corporate tax rate will be 0% for taxable income not exceeding AED 375,000
The UAE corporate tax rate will be at 9% for taxable income exceeding AED 375,000
Commonly, the International Financial Reporting Standard (IFRS) is used in the UAE for preparing financial statements.
2. DEDUCTIBLE EXPENDITURES
Entertainment Expenditure- 50 % allowed
Expenses associated with entertainment of customers, shareholders, suppliers and other business partners such as meals, accommodation, transportation, admission fees, facilities and equipment used for entertainment and other expenses specified by a Cabinet decision can be deducted up to 50% of the amount incurred.
Interest Expenditure-30% of EBIDA allowed
- Net Interest Expenditure (“NIE”) allowed up to 30% of EBITDA.
- The net interest expense amount disallowed for deduction under the interest capping rules could be carried forward and deducted in the subsequent ten tax periods.
In addition to the general interest limitation rule set out above, no interest deduction will be allowed if the loan was obtained, directly or indirectly, from a related party for the following transaction with the related parties:
- dividends / profit distribution.
- redemption, repurchase, reduction or return of share capital.
- capital contribution; or
acquisition of ownership interest in a legal entity, who is or becomes a related party following acquisition.
100%-Non- Deductible Expenditure
- Exempt Income
- Capital in nature. (Expenditure that is not of a capital nature and is incurred wholly and exclusively for the purposes of the Taxable Person’s Business should generally be tax deductible).
- Fines and penalties (other than compensation for damages for breach of the contract)
- Dividend/profit distributed.
- Bribes and other illicit payments
Donation paid (except to Qualified Public Benefit Entity) - Recoverable input VAT
- Non-business expenses, i.e., Personal expenses
- Such other expenses as may be specified by the cabinet minister.
- Taxes imposed outside UAE.
3. TAX LOSSES RELIEF
Business can offset tax losses against the Taxable Income of subsequent tax periods when computing the Taxable Income for that period. The set-off during any tax period cannot exceed 75% of the Taxable Income for the tax period. Any tax loss remainder can be carried forward to a further subsequent tax period indefinitely.
UAE CT allows transfer of tax losses between group entities:
- Where there is 75% or more common ownership and
- Where other certain conditions are met, such as having the same financial year and using the same accounting standards and
- Not being exempt person or qualifying free zone person.
The CT Law provides that the tax losses can only be carried forward and utilised by a Taxable Person on satisfaction of the following conditions:
- The same shareholder(s) hold at least 50 percent of the share capital from the start of the period a loss is incurred to the end of the period in which a loss is offset against taxable income.
- If there is a change in ownership of more than 50 percent, tax losses may still be carried forward provided the same or similar business is carried on by the new owners.
No tax loss relief will be available for the following losses:
- losses incurred before the effective date of CT;
- losses incurred before a person becomes a taxpayer for CT purposes;
- losses incurred from activities or assets which generate income that is exempt from CT; or
- losses incurred by a Free Zone Person that are not attributable to a PE in the mainland
4. UNREALISED GAINS OR LOSSES
Unrealised gains or losses arise in instances where an asset or liability held by a business has changed in value but no transaction to generate a gain or loss has yet taken place. For example, when a business property increases in value, but the property is not sold, the gain would be unrealised. These gains or losses may be recorded for accounting purposes even though they are not yet realised.
Based on the CT Law, a Taxable Person can opt for the following:
(a) Elect to recognise gains and losses on a ‘realisation basis’ for the CT Law purposes that is, any and all unrealised gains would not be taxable (and conversely, any and all unrealised losses would not be deductible) until they are realised; or
(b) Elect to recognise gains and losses on a ‘realisation basis’ for the CT Law purposes for assets and liabilities held on capital account only – that is, only unrealised gains and losses in respect of assets and liabilities held on capital account would not be taxable or deductible, respectively, until they are realised.
Unrealised gains and losses arising from assets and liabilities held on revenue account, would continue to be included in taxable income on a current basis.
5. EXEMPT INCOME
UAE resident companies will be subject to CT on their worldwide income, including capital gains. However, to avoid instances of double taxation, the CT regime will exempt certain forms of income from taxation.
Participation Exemption
A UAE corporate shareholder will generally be exempt from CT on dividends and other profit distributions received from a foreign juridical person in which a *Participating interest is held, will be exempt from UAE CT.
Other income (e.g. foreign exchange, impairment and capital gains and losses) received from residents or non-residents will be exempt from UAE CT where the *Participating interest requirement is met.
* Participating interest means:
(i) The ownership interest is at least 5%;
(ii) A 12 month uninterrupted holding period (or the intention to hold for 12 months) is in place;
(iii)The Participation is subject to tax in its country or territory of residence at a rate that is not lower than 9%;
(iv) Not more than 50% of the direct and indirect assets of the participation consist of ownership interests or entitlements that would not have qualified for an exemption from Corporate Tax if held directly by the taxable person and
(v) any conditions prescribed by the Minister are met
A participation shall be treated as having met the subject to tax condition where all of the following conditions are met:
- The principal objective and activity of the participation is the acquisition and holding of shares or equitable interests that meet the participation conditions; and
- The income of the participation derived during the relevant tax period or tax periods substantially consists of income from participating interests.
The Participation exemption will not be available for a period of 2 years where a Participation Interest was derived by acquisition of interest that did not satisfy the Participation Interest conditions or the acquisition was subject to group or restructuring relief.
Foreign Permanent Establishment Exemption
A Resident Person could create a PE in another jurisdiction based on the domestic tax laws of this jurisdiction and the income attributed to such a Foreign PE will be taxed in that jurisdiction.
The UAE CT Law provides an option to the Resident Person to elect for an exemption of this income in the UAE in such a scenario. UAE companies can opt either:
(a) Elect to claim an exemption for their foreign branch profits.
The exemption will be available if the Foreign PE is subject to CT or similar taxes at a rate not less than 9% in the foreign jurisdiction. If the resident person opts for this exemption, it will not be eligible to take into account losses, income, expenditure and foreign tax credits in relation to the Foreign PE in the UAE.
(b) Claim a foreign tax credit for taxes paid in the foreign branch country
The maximum Foreign Tax Credit available will be the lower of the amount of tax that is paid in the foreign jurisdiction; or the UAE CT is payable on the foreign sourced income.
International Transportation Exemption
Income earning by way of leasing or operating aircraft or ships is exempt from the purview of corporate tax if the following conditions are fulfilled:
Such income is earned by a non-resident
The leased aircraft or ship or any associate equipment is used for international transportation (with a reciprocal arrangement from foreign jurisdiction).
6. GROUP RELIEFS
Transfers within a qualifying group
The CT Law provides tax relief on intra-group transfer of assets or liabilities between Taxable Persons that are members of the same *Qualifying Group.
*Qualifying group: Taxable persons shall be treated as members of the same qualifying group where:
- The members are juridical persons which are UAE residents or non-resident persons that have a permanent establishment in the UAE;
- Either owns 75% or more of the other, or a third party owns 75% or more of both entities;
- Neither member is an Exempt Person;
- Neither member is a Qualifying Free Zone Person; and
- Members prepare their financial statements using the same accounting standards, and have the same financial year.
There will be no gains or losses from transfer of assets or liabilities, between two Taxable Persons who are part of the same Qualifying Group.
There is a clawback period of 2 years from the date of initial transfer in the case there is a subsequent transfer of such asset or liability outside the permitted group or where the transferor or transferee ceases to be the member of the permitted group.
Business restructuring relief
The UAE CT Law provides tax relief on mergers, spin-offs and other corporate restructuring transactions where the whole or independent part of a business is being transferred in exchange of shares or other ownership interests, provided the following conditions are met:
- the transfer is in undertaken accordance with the applicable regulations in the UAE;
- the Taxable Persons are Resident Persons, or Non-Resident Persons that have a PE in the UAE;
- none of the Persons are regarded as an Exempt Person or a Qualifying Free Zone Person;
- have the same financial year and prepare the financial statements using the same accounting standards; and
the transfer is undertaken for valid commercial or economic reasons.
When there is transfer of shares or ownership interest between two Taxable Persons under a business restructuring, there will be no taxable gains or losses from such a transfer.
There is a claw back period of 2 years from the date of the transfer if there is a subsequent transfer to a third party, or shares or ownership interests received are transferred or otherwise disposed of, the gains or losses on the initial transfer will be reported in the period in which the subsequent transfer is made to the third-party.
7. SMALL BUSINESS RELIEF
Taxable persons that are resident taxable persons (legal / juridical or individual) can claim Small Business Relief where their revenue in the relevant tax period and previous tax periods is below three 3 million AED for each tax period.
Relief cannot be claimed by:
- Qualifying Free Zone Persons
- Entities forming part of MNE groups with consolidated group revenues of more than AED 3.15 billion
Carry forward of “Tax Loss” and “Excess Net Interest Expenditure” allowed for the tax periods where Small Business Relief is not elected.
Anti-abuse provisions would apply in case of artificial separation of business to take benefit of Small Business Relief.
Disclaimer:
This summary is based on a review of the UAE’s corporate tax law published by the UAE’s Federal Tax Authority and other publications. Several provisions within the law will be ratified by ministerial decisions or tax authority rulings. Please contact your adviser for specific tax advice.